The Indicator Banks Actually Used

Institutional traders and VWAP.

Institutional investors often use VWAP to buy and sell securities.

Citadel, one of the world’s largest and most successful hedge funds, uses VWAP to execute orders in the market.

Kenneth Griffin, Citadel’s Founder and Chief Executive Officer, spoke before the U.S. House of Representatives in 2021. When asked how Citadel executes order for clients Mr. Griffin said, “virtually all trades executed by institutional investors are in the form of program trades such as volume-weighted average price (VWAP) and other algorithmic trades.”

Selling or buying a large quantity of shares in a single order would result in slippage and other inefficiencies.

Instead, orders are sliced into blocks and sold at or slightly above the VWAP or bought at or slightly below the VWAP. This ensures a fair execution price while reducing volatility.

If institutions bought above the VWAP, it would likely push the price up quickly and make it more expensive for the next order block. This is why prices can revert toward the VWAP throughout the trading day.

For intraday traders, the VWAP is often used as a trend indicator. For money managers and institutions, it’s often used as benchmark price value to gauge the quality of executions from their traders or market makers. Hedge funds and algorithms will embed VWAP into their trading systems for various strategies. VWAP is widely followed and that in itself can make it a self-fulfilling factor of importance. 

The VWAP often acts like a magnet, guiding the price back to it. The markets tend to return to their fair values, or rather, average prices to test the buyers’ and sellers’ intentions. This is what’s known as ‘mean reversion’ – a concept that drives the effectiveness of the VWAP indicator.

The CEO of Citadel, a Hedge Fund with over $62 Billion in assets under management, openly stating that they use VWAP to execute trades with great returns. (Source: rev.com, 2021)

Just a reminder. Citadel uses the VWAP to trigger algorithms against us. When you start to see a spike and it touches the upper band and expect a dip on to standard deviations.  Kenny Told us he did this in his congressional hearing. 

Article

Share: